A Pyrrhic Negotiation Victory Versus Customer Relationship-Building

Many individuals view negotiations as an adversarial, zero-sum process in which manipulation, gamesmanship and intimidation are effective and worthwhile tactics. Perhaps you have even heard one of your counterparts brag about “drawing blood” or beating the other party.

This philosophy is illustrated by the classic movie Glengarry Glen Ross, where the sales manager (played by Alec Baldwin) beats his sales reps relentlessly to do anything they can to close deals. Manipulation, intimidation and lies are encouraged. During Baldwin’s tirade, he yells at Jack Lemmon’s character: “Put. That coffee. Down. Coffee’s for closers only.” The theme of the movie is that the legitimate needs of the prospective customer are not to be considered … just do what’s necessary to close the deal.

While this movie’s portrayal is a cynical example, there are instances where those with good intentions can act in ways that produce short-term gain and long-term pain. The so-called negotiation victory can turn out to be “pyrrhic,” which Merriam-Webster defines as “a victory that is not worth winning because so much is lost to achieve it.” This loss can come in many forms: squandered goodwill, decreases in future revenue and the inability to use that client as a reference.

Listen To The Problem

Behavioral economics and interest-based or integrative negotiations are prime factors at work. In a crisis environment, emotions can run high and the willingness to listen and patiently work through a problem can erode. But if we are willing to take a breath and step back, it is actually easier to listen to the problem we and the other side are trying to solve, and then work jointly on solving it. This is far preferable to the alternative — taking a position and beating each other up over our respective positions.

A personal example will illustrate the concept. Say my wife and I are discussing (negotiating) which movie to watch. I may be in the mood for an action-adventure, while she may prefer a romantic comedy. A win-lose attitude here will likely lead to a negative outcome. However, if we take the time to identify the criteria that makes a good movie for each of us, then we can find an acceptable compromise. Even if one of us concedes, we will feel that our needs have been heard.

Your Task: Separate The Means From The Goals

Remember that means are merely ways of reaching goals. Customers often articulate their means instead of their goals. This can cause negotiations to get bogged down, especially if they state requests as if they were mandatory.

In the business arena, we may hear something like “I need supply guarantees” from a stakeholder. The sales rep runs to management and says, “They need supply guarantees.” And management says, “We can’t give them supply guarantees.” This creates an impasse that satisfies no one.

The impasse could have been avoided if the seller had simply asked the stakeholder, “Why do you need supply guarantees?” Perhaps the answer is, “We have been burned in the past with this problem.” At the same time, the seller’s management feels they may not be able to give supply guarantees because of other commitments and their economic inability to build a separate line to manufacture “just in time.”

If you know these rationales, you can find a number of potential solutions. For example, if it’s important enough to the buyer, perhaps they can finance some inventory up front or can provide guarantees in return for an allocation that still provides sufficient supply to meet the seller’s other commitments.

Understand The Importance Of Principled Concessions

Prospective customers will sometimes ask for things that are unreasonable or that come as a surprise. Such requests that do not have a reason (or where you do not understand the reason) are a staging point for “unprincipled concessions” — which I define as concessions that are not tied to credible business rationale. My experience in this area has shown that agreeing to unnecessary concessions can cost companies double-digit percentages while jeopardizing successful implementations and service quality — a large price to pay.

An example of an unprincipled concession is when a prospect says, “Give us a 20% discount and we can get started.” This is a negotiation inflection point at which the way you react can keep the process on a path to success or one headed for failure. Your perception of unreasonable demands can cause reactions ranging from annoyance to fear and panic. You may concede and wish you hadn’t or perhaps get into a heated exchange with your negotiation counterpart. So, what is the alternative?

Just as in our supply guarantee example, the alternative is to ask that simple but profound question: Why? Before becoming defensive, you need to uncover whether they have legitimate price concerns, are not sold on your value or are fishing for a better deal. By searching for the “why,” you can separate the means from the ends and give yourself more time to craft the appropriate relationship-maintaining response — perhaps a change in scope and outcome or alteration of terms.

Just as your prospect can request an unprincipled concession, sellers sometimes offer arbitrary concessions in a misguided attempt to get a deal moving — e.g., they provide a substantial discount to make a deal happen faster. Be careful because it can signal to the prospect that you lack confidence in your value and encourage them to ask for more. You could end up with a delayed deal with reduced revenue and a client who knows you will concede on pricing issues in the future. The goal is always to maintain your value, credibility and positive leverage.

Focus On Positive-Sum Negotiations

Here is the bottom-line. Every person who participates in the selling and negotiation process needs to remember that negotiations are conversations that help parties find mutually beneficial solutions for their problems and creative avenues to grow their businesses. If this attitude is reflected in your speech and in your actions, you can create relationships that are profitable and productive for years to come.

Note: this article originally appeared in July, 2020 on Forbes.com. You can view the original post here.

Executive support customer negotiations

How C-Level Executives Can Be Powerful Negotiation Assets

Several years ago, I wrote an article for Chief Executive magazine titled “Negotiation Lessons: When CEO Meddling Degrades the Deal.” This was one of my more important articles for CEOs and other C-level executives because deals involving C-levels usually have a major impact on business results. And currently, since many companies are conducting negotiations remotely, you’re even more likely than before to get involved in those key deals if you are a C-level executive working from home.

In the “Lessons” article, I made the point that it can be difficult to walk away from a deal, especially when your team has invested significant time, energy, resources and dollars toward achieving a particular objective. Once this investment takes place, you are emotionally invested, even if the deal has deteriorated well below the optimistic value you originally envisioned — something that is a more likely scenario under the current circumstances.

Once your team has been engaged in a specific deal, there are a myriad of ways you, as the CEO (or other member of the executive team), can assist to ensure it stays on track, adds value to the company or, in cases where it will not work, is quickly terminated. Here are some key directives all C-level executives should heed.

1. Do your homework. Most C-levels have experienced the pain of joining a call at a critical juncture and being expected to contribute or take over the discussion without fully understanding the critical aspects and most recent developments. The key is to ensure you are prepared and limit your level of input to what you know. Otherwise, stay out of the deal until your team updates you and you feel prepared. One caveat: keep out of the weeds. As the executive in the deal, your job is not to go over every term or line item but rather to highlight the strategy behind the venture, the value of the relationship and, if necessary, make some planned “principled concessions” to smooth road bumps and facilitate closure.

2. Showcase the risk/reward/action analysis. Simply stated, if the risks of action for the other side, or for you in entering into an agreement (whether it’s a partnership, purchase or sale agreement), are not overcome by the risks mitigated and the rewards gained by taking the action, the deal should not happen, especially in the current environment. This is where the CEO comes in by addressing risks and highlighting rewards, especially for their counterparts who may be stressed about their future and business fortunes. This approach should reinforce what your team has already discussed with the other side, albeit at a higher level.

3. Upscale the master-servant relationship. Your relationship with your counterparts can range from that of a mere vendor or customer to a strategic partner (and everything in between). Instead of a subservient situation, you want to create a peer-to-peer relationship based on exchanged value and mutual respect. As the CEO, you can use your stature to help achieve this objective by highlighting the value (business impact) that you deliver.

4. Make principled negotiations part of your culture. My business helps organizations make large leaps in the ability to practice effective multi-lateral (“win-win”) negotiation strategies. In almost every case, their success in this area has been driven by the client’s commitment from the top. Yes, individual sales or procurement professionals and managers want to improve in this area and to generate and reap the benefits, but it takes blessings and support from the C-suite to ensure that this is more than just another checkbox item on the training calendar.

5. Make it about them and not about you. Even rockstar CEOs like Satya Nadella and Jeff Bezos likely understand that, despite their notoriety, when it comes to making big deals happen, they need to step back and let the other side shine. Just look at the way Microsoft announced the LinkedIn deal a few years ago — the two companies focused on the users and shareholders of LinkedIn. When you help prospects come up with intelligent solutions without showing off how smart you are, they will realize the value of your partnership.

6. Create value-based relationships. Whether you are a CEO or other C-level executive, the more knowledgeable you are about value-based negotiation strategies, the more you will enjoy the process. And you will pass this positive feeling to your team, as well as your counterparts. I recently observed Bill McDermott, CEO of ServiceNow, on CNBC. Even during the current crisis, his enthusiasm about the business impact his company has for its worldwide clients is genuine and infectious. Knowledge-based enthusiasm about your customers helps fuel better outcomes for everyone. It may sound counterintuitive, but if your primary goal is to close the deal, you may close fewer deals. Conversely, if your primary goal is to create value-based relationships for everyone, you could close more deals, both in the short-term and long-term.

An example of a CEO who seems to have done this right was Mark Hurd, former co-CEO of Oracle and CEO of HP, who recently passed at the far-too-young age of 62. Of the hundreds of condolence comments from his former colleagues, many were from sales reps who had worked for him at HP, NCR or Oracle. They spoke about Mark Hurd’s ability to listen, ask relevant questions, do his homework and be supportive of both the sales rep and potential customer. Most importantly, despite his great success in the technology industry, I found that Hurd presented himself with empathy and humility.

The article I mentioned in the first paragraph contains a case study that illustrates how failing to practice the above strategies resulted in a highly flawed deal. Please read this to learn more about what not to do. Most importantly, heed the six directives above and you can’t go wrong. As a CEO or C-level executive, you can and should be the greatest asset in your company’s arsenal. Use that power to create long-term profitable relationships. Your customers and shareholders will thank you.

Note: this article originally appeared in May, 2020 on Forbes.com. You can view the original post here.

sales psychology

Discounting, Sales Psychology And Behavioral Economics

Not long ago, I spoke with an IT service provider (our client), who related an impactful discussion with a telco customer’s procurement director. The company offered a $5,300 discount as an incentive to begin the implementation of a customer relationship management (CRM) system for $53,000. Here is a summary of the dialogue:

Vendor: It’s a smart decision for you to move from managing your customer data with spreadsheets to an automated CRM system. To get started sooner, we are prepared to give you a 10% discount.

Buyer: Can you explain that please?

Vendor: Our understanding is that starting phase one ASAP is critical because your people are managing hundreds of customer relationships with a spreadsheet-based system, and your sales per customer need to improve relative to the industry.

Buyer: So, the 10% discount is solely on the $53,000 price tag?

Vendor: Yes.

Buyer: But this is just an initial deployment. You know the deployment plan is for 250 seats by end of year one, 1,200 in year two and full deployment of 2,500 seats by end of year three. By that time we will have invested over five million with you and others! And you are offering a $5,300 discount. That’s just a rounding error! The discount should be $500,000!

At this point, it was clear that the discount strategy had backfired. There are multiple reasons for this.

The Importance Of Perspective.

The 10% discount ($5,300) may have been attractive in context to the original cost of $53,000. However, the customer viewed the transaction against their total investment for the solution, which from their viewpoint rendered the discount as trivial — less than a fraction of one percent. Instead of being a positive, this was viewed almost as an insult. While predictable, the customer’s reaction was not rational because a savings of $5,300 is the same whether it is a savings applied to $10,000 or $10,000,000.

This reaction is an example of what behavioral economists, such as Dan Ariely, call predictably irrational. We have all experienced examples of this. For example, my cousin recently drove 20 miles to a supermarket because of a 50% off sale. He bought $100 worth of groceries for $50. The next day he bought a $1,500 grill from the local hardware store because it was “only” $75 more than the one at Home Depot, which was 10 miles away and “not worth the trip.”

Lack Of Rationale For The Discount.

The client’s indignation points to the vendor’s loss of credibility for failing to recognize the full context. If the customer has a business reason to make the purchase sooner, then the discount is not needed to motivate a decision. Again, the rationale offered made no sense in this context.

Procurement’s Role.

Procurement’s role is not only to fulfill strategic internal requirements, but to do so at the lowest cost possible. Therefore, it’s not surprising that procurement wanted to expand any discount discussion to the overall investment the customer would make.

Emphasis On Discount Rather Than Value.

The customer was making a significant investment to improve their business. This would have been a much better focus to get the deal done and cement a credible relationship.

Shifting The Perspective To Value

As a result, when debriefing our client, we decided to focus on the value-based leverage of their solution. We spoke with our client and asked three essential questions:

  1. Why is the telco making an investment?
  2. Why would they make the investment with you?
  3. How much are the answers to the first two questions worth to the client?

From these questions, our client realized they should win because their differentiation had a direct impact on the very reason the telco was implementing new CRM systems in the first place: Their sales per customer were currently lower than their competition’s. Our client had differentiation because they had implemented similar systems for them before, and there was proof they could implement the new solution six months sooner than others could. The value of the six months was between $8 and $15 million, at least 2.5 times more than the cost of the entire solution for three years.

We suggested that they call the person who had evaluated their solution in the first place, with whom they had a relationship, as well as the customer’s head of sales, to discuss the importance of implementing six months sooner. If the impact was anywhere close to the vendor’s estimates, no discount would be necessary, and getting the deal done sooner would be a matter of urgency for the customer.

Unfortunately, procurement had already received a discount and wanted it applied across a future rollout of the solution. We suggested that any discount promised for the future should be tied to a commitment from the customer. This would make the discount a “principled concession.” To make it easier, we suggested giving the customer some alternatives that we call multiple acceptable proposals (MAPs) for different levels of commitment. Ultimately this approach was successful because the customer felt they had control by having some choices, while the built-in concessions were principally related to each alternative deal construct.

This scenario presents many lessons, including the following:

  1. Don’t offer discounts as an “incentive” unless it is necessary as a principled concession to solve a problem, (e.g., you are at a price disadvantage and the competition delivers a comparable outcome). This was not true in this case.
  2. Ask the three questions listed above to discover whether you have value-based leverage. The answers will reveal whether any discounts or incentives are required and whether your opportunity is real.
  3. When you provide value to the customer rather than dictating terms, offer them choices that contain some different business outcomes. This will enable them to make a value-based decision by comparing credible alternatives. You will give the customers a feeling of control while staying principled in your discussions.

In the meantime, ask: Why? Why you? How much are you worth to them? And, of course, offer your customers options that are value-based so they can make informed decisions.

Note: this article originally appeared January 2020 on Forbes.com. You can view the original post here.

Properly Manage Internal Expectations

Almost every sales organization and every seller operates under some pressure associated with quantifying and then making their sales numbers. The instincts that cause this are positive – the desire to succeed by meeting or exceeding quota, or perhaps to be seen as a top performer within the sales organization.

There are three related manifestations of this pressure that negatively impact the seller’s ability to deal with complex buy cycles.

  • We may raise expectations of success with internal management on deals where some of the fundamentals are missing or will take more time to develop. Such expectations can be made through forecasting in the CRM system or by what sales reps promise to their managers. Regardless of how this occurs, not taking reality into account affects the seller’s credibility and results.
  • We rush, trying to speed up the process. If the deal is not moving at the pace we desire (or which is imposed from above), this leads to mistakes and a loss of credibility internally or externally. In either event, that loss of credibility will further prolong the sales cycle or result in a lost opportunity.
  • We make unprincipled concessions in an attempt to get the prospect to act faster. As I explain in an earlier article, unprincipled concessions are “giveaways” not tied to a credible business rationale. Our research shows that this simple negotiation mistake costs businesses between 9 and 18% of gross revenue and significant profit. This is a much too high a price to pay in any sales scenario, especially when it doesn’t contribute to revenue.

To overcome the negative impact of these manifestations, I suggest you deal with each in a conscious way, in order to eliminate or reduce the mistakes and frustration caused by internal pressure. Very few individuals operate more effectively while under pressure. Prospects can sense it, and managers can sense it, and neither responds well to the type of selling environment caused by pressure.

One of the often unspoken issues is that the buying cycle can be vastly different from the sales cycle. Sales management can choose to dictate a certain sales cycle; say four months. However, while this sounds ok, the buyer may have a far different perspective on the timing of the deal. This is a good example of the quote, often attributed to John Lennon, “Life is what happens to you while you are busy making other plans.”

A few years ago, a friend was under some pressure to get a strategic contract done for his company. His executive called for status updates daily (sometime more often). He had a contract draft ready for the customer that at least one person other than him would normally review (two sets of eyes before something important goes to a customer is a good policy).

However, he felt he could not afford the couple of hours that the review would take. The contract had a critical typo in it that caused an internal escalation within the customer. While the deal was done, it took a week longer as a result. As mentioned above, the motivation for going against standard operating procedure was sound: the desire to make the sale happen on schedule.  However, in hindsight, the cost of the extra week was not worth the potential few hours saved.

Setting honest expectations and describing key dependencies and timing is always good practice, though it may not be what the boss wants to hear. This does not mean making excuses – rather it means being factual and explaining what needs to happen and what you are doing to facilitate an optimal outcome. This may be a bit painful in the short-term, where pressure to meet this quarter’s number is strongest – but it will definitely pay off over time, in terms of streamlined, less-painful and more profitable sales.

Negotiation Examples: How Avoiding Unprincipled Concessions Kept the Customer’s Respect (And Won More Revenue)

 

When competition starts putting the pressure on you, it’s natural to look at price-cutting as the primary way to keep the business. But in the long run, this is a mistaken impulse, unless accompanied by a sound business rationale such as a reduction in scope, change in terms or outcome from the deal. One of our engagements with a client that served a European industrial (the customer) with technology solutions definitely illustrated the value of avoiding such “unprincipled concessions!”

Unprincipled concessions are “giveaways” not tied to a credible business rationale. Our research shows that this simple business negotiation mistake costs companies between 9 and 18% of gross revenue and significant profit. (See our infographic on the topic for a more detailed discussion of this vital principle and how it can be applied.) Read more

Unprincipled Concessions Cost You Money at the Negotiating Table

Spot Them, Avoid Them and Close Faster

Unprincipled concessions are concessions not tied to a credible business rationale. Years of research show us that this simple business negotiation mistake costs companies between 9 and 18% of their gross operating revenue.

Principled Concessions Infographic

Read more

Six Principles Every International Negotiator Must Know: Concessions Easily Given Appear of Little Value

This is the seventh post in a series entitled: The Principles of International Negotiation: Finding Universal Value in a Complex World

It’s a worldwide phenomenon: You’re on vacation in a foreign country and decide to buy a souvenir. You know you shouldn’t pay the price they’re asking, so you make a lower offer on that “locally produced” carving. The vendor takes it. As your purchase is being wrapped, you’re thinking, “That was too easy. I could have bought it for less.”

We’re not trying to teach you to deprive starving artists of their living. But whenever someone asks for and easily gets a concession, Read more

Principled Concessions™ – The short version

In our workshops, we teach the concept of a “Principled Concession™”.  Many people hear this and confuse it with the related but different concept of trading concessions in a negotiation.  They think of common examples like these:

  • “If you buy 2, I can discount the second one by 50%.”
  • “If we reduce the scope by providing service 12×7 instead of 24×7, we can lower the price by 20%.”
  • “We can finance your total $100M payment for this project, at a cost to you of $1M.”

These “offers” follow the least-acceptable form of changing your position.  It is a more acceptable form than this one:

  • “I’ve sharpened my pencil, and I can offer you an additional 12% off the price.”

It is easy to see that the first three are preferable to the last one.  The 12% price reduction in the last example implicitly contains a message that your profit margin is high enough to offer a discount.  The buyer is now challenged to take that information, and try to find out how much margin, through extended negotiating.  Instead of the goal which the offer is usually intended to achieve (faster closing), it actually creates buyer uncertainty, loss of confidence, and delay.

Let’s reframe the first three in the form of Principled Concessions™:

  • “If you buy 2, I can discount the second one by 50% – and you’ll be able to use both at the same time when needed to perform (whatever desired outcome you bought them for).”
  • “If we reduce the scope by providing service 12×7 instead of 24×7, we can lower the price by 20%.  However, your mission-critical revenue-collection application will take longer to restore during the unsupported hours, and your revenue could be impacted by $25,000 for each hour of delay.”
  • “We can finance your total $100M payment for this project, at a cost to you of $1M.  This will allow the project benefit stream (in $) to pay for the continuing costs, and you will avoid significant out-of-pocket costs, thereby freeing up that money for other investments.”

In each of these cases, we are describing the exchange in terms of outcomes to each side.  For the seller, this is money.  The buyer gets simultaneous use (for whatever purpose), risks losing revenue, or will free up funding for other projects.  In each case, the outcome description provides a business basis for the concession, and allows the buyer to make the decision on the basis of business value.  In the real world, the outcome descriptions would be even more robust, but these examples convey the intent.

So here is the formal definition of a Principled Concession™: A concession given with a specific connection to business value.  The alternative form is this: A concession expressed as an exchange of outcomes.   (td)